First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

June 5

Here comes the sun

Geoffrey Jones and Loubna Bouamane explore the history of the solar industry in their paper, Power from Sunshine: A Business History of Solar Energy. It has been tough going for entrepreneurs and the larger companies that acquired them, according to the authors, in "an industry in which achieving a viable business model proved a chimera, whilst waves of creative destruction became the norm."

Insurance companies reach for yield

Insurance companies are the largest institutional holder of corporate and foreign bonds, so understanding their investment decisions is fundamental for many things economic. In the working paper Reaching for Yield in the Bond Market, professors Bo Becker and Victoria Ivashina uncover evidence that insurance companies often "reach for yield"—that is, look to buy riskier assets in the hopes of recording higher yields. "We show that, conditional on ratings, insurance portfolios, compared to those of pension funds and mutual funds, are systematically biased toward higher yield, higher CDS bonds," the paper states. The reasons for this behavior and potential consequences are discussed.

Understanding the health care market

Is the American health care system as inefficient as many critics argue? One way to get to the answer is through a comparative study of health care systems in other countries. A new industry background note, "The Market for Healthcare," by Joseph L. Bower and Michael Norris, includes just such a study in offering plenty of discussion material about how care can be delivered with higher quality at lower cost.

 

Publications

Towards an Understanding of the Role of Standard Setters in Standard Setting

Abstract

We investigate the effect of standard setters in standard setting: we examine how certain professional and political characteristics of FASB members and SEC commissioners predict the accounting "reliability" and "relevance" of proposed standards. Notably, we find FASB members with backgrounds in financial services are more likely to propose standards that decrease "reliability" and increase "relevance," partly due to their tendency to propose fair-value methods. We find opposite results for FASB members affiliated with the Democratic Party, although only when excluding a financial-services background as an independent variable. Jackknife procedures show that results are robust to omitting any individual standard setter.

Publisher's Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1617398

The Question of IFRS Adoption: A Very Long Engagement

Abstract

An abstract is unavailable at this time.

Publisher's Link: http://viewer.zmags.com/publication/f0a1b93d#/f0a1b93d/12

 

Working Papers

Location Choices under Strategic Interactions

Abstract

The literature on location choices has mostly emphasized the impact of location and firm characteristics. However, most industries with a significant presence of multi-location firms are oligopolistic in nature, which suggests that strategic interaction among firms plays an important role in firms' decision-making processes. This paper explores how strategic interaction among competitors affects firms' geographic expansion across time and markets. Specifically, we build a model in which two firms that differ in their capabilities enter sequentially into two markets with different potentials for profit. The model is solved using game theory under three learning scenarios that capture the ability of a firm to transfer its capabilities across markets: no learning, local learning, and global learning. Three equilibrium strategies arise: accommodate, marginalize, and collocate. We identify how these strategies emerge depending on the tradeoff between the opportunity costs of absence (giving competitors a lead in a market) and the entrenchment benefits (the cost advantage firms develop through learning-by-doing when they enter early). Both the opportunity costs of absence and the entrenchment benefits vary according to initial relative firm capabilities, relative market profitability, and learning rates. Our model offers a comprehensive approach to understanding the drivers of firm location choices by modeling not only the impact of location and firm heterogeneity, but also the strategic interaction among firms.

Download the paper: http://www.hbs.edu/research/pdf/12-104.pdf

Reaching for Yield in the Bond Market

Abstract

Reaching-for-yield-the propensity to buy riskier assets in order to achieve higher yields-is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance but higher volatility of realized returns.

Download the paper: http://www.hbs.edu/research/pdf/12-103.pdf

'Power from Sunshine': A Business History of Solar Energy

Abstract

This working paper provides a business history of solar energy between the nineteenth century and the present day. It covers early entrepreneurial attempts to develop solar energy, the use of passive solar in architecture before World War II, and the subsequent growth of the modern photovoltaic industry. It explores the role of entrepreneurial actors, sometimes motivated by broad social and environmental agendas, whose strategies to build viable business models proved crucially dependent on two exogenous factors: the prices of alternative conventional fuels and public policy. Supportive public policies in various geographies facilitated the commercialization of photovoltaic technologies, but they also encouraged rent-seeking and inefficiencies, while policy shifts resulted in a regular boom and bust cycle. The perceived long-term potential of solar energy, combined with the capital-intensity and cyclical nature of the industry, led to large electronics, oil, and engineering companies buying entrepreneurial firms in successive generations. These firms became important drivers of innovation and scale, but they also found solar to be an industry in which achieving a viable business model proved a chimera, whilst waves of creative destruction became the norm.

Download the paper: http://www.hbs.edu/research/pdf/12-105.pdf

 

Cases & Course Materials

The Market for Healthcare

Joseph L. Bower and Michael Norris
Harvard Business School Note 312-040

This note describes the market for healthcare, primarily in the U.S., but also in other parts of the world to the extent that features of the system in particular countries are instructive. It also contains exhibits that display comparative performance of the system in terms of cost and quality. It raises the question of how health care can be delivered with higher quality at lower cost.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/312040-PDF-ENG

Todd Krasnow: From Startup to Corporate and Back

Myra M. Hart and Janet Kraus
Harvard Business School Case 812-121

An abstract is unavailable at this time.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/812121-PDF-ENG

Sino-Forest (A)

David F. Hawkins and David Lane
Harvard Business School Case 112-004

A Chinese company listed on the Toronto Stock Exchange is accused of fraud by a hedge fund.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/112004-PDF-ENG

Sino-Forest (B)

David F. Hawkins
Harvard Business School Supplement 112-066

Excerpts from a hedge fund's report accusing a Chinese bond company of using fraudulent financial statements.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/112066-PDF-ENG

Sino-Forest (C)

David F. Hawkins
Harvard Business School Supplement 112-067

An abstract is unavailable at this time.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/112067-PDF-ENG

Location Choice for New Ventures: Choices within Cities

William R. Kerr and Alexis Brownell
Harvard Business School Note 812-036

This note describes location choice decisions for start-up companies within a city: for instance, what to look for in a facility and the economics of clusters.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/812036-PDF-ENG

Variety: Taking the Biz Overseas

Mukti Khaire
Harvard Business School Case 812-111

An abstract is unavailable at this time.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/812111-PDF-ENG

Georges Doriot and American Venture Capital

Tom Nicholas and David Chen
Harvard Business School Case 812-110

Following the lean years of the Great Depression when bankruptcies proliferated and financing for new ventures virtually dried up, new demand for capital was created in a post-War environment of scientific and industrial expansion. Venture funding occurred more widely in the United States than it ever had done before. While the roots of the American venture capital industry are long-standing and multifaceted, they are frequently traced back to the pioneering initiatives of the French General and Harvard Business School professor, Georges Doriot, who established the American Research and Development Corporation (ARD) in 1946.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/812110-PDF-ENG

Bharti Airtel in Africa

Krishna G. Palepu and Tanya Bijlani
Harvard Business School Case 112-096

In June 2010, Bharti Airtel, India's largest mobile services operator, acquired the African assets of Bahrain-based Zain Telecom for $10.7 billion-the largest ever cross-border deal in emerging markets. Bharti's executives envisioned that they would replicate the highly successful high-volume, low-cost telecom model that they had pioneered for the Indian masses in Africa. But when they began to integrate the companies, Bharti's executives discovered a slew of unexpected challenges, including cultural differences between their Indian and African employees, poorer infrastructure than they had expected with higher-than-anticipated costs, a monopolistic distribution network, strong competitors, a weak partner ecosystem, and a market that was unresponsive to tariff cuts. In early 2012, a year and a half later, the company has outsourced its networks, IT and customer service operations like it did in India; launched a unified brand across the continent; and culturally integrated with its new environment. Key business metrics, including profit margins and market share, are showing early signs of improvement. But questions remain about whether the company will be able to overtake MTN, Africa's leading player, by lowering tariffs like it did in India, and what its strategy should be going forward.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/112096-PDF-ENG